The economic data from June was generally pretty good. This means that Q2 GDP data is probably going to look pretty good, especially on a sequential basis compared to a surprisingly weak Q1. What do we do with that?

Unlike most, we don’t jump in on the last data point and run with it. Q1 was surprisingly bad; Q2 looks to be surprisingly good. Put that way, it’s just noise, with no trend. In fact, the general trend, both in long-term GDP and shorter-term intra-quarter data, remains negative. That could change, and if it does, we will consider changing our stance, but right now a good June isn’t enough to consider the slowing trend to have changed meaningfully.

In fact, it’s kind of interesting to pace through what this means. Q2 GDP is likely to look good. This should create a more hawkish Fed and could even lead to a rate hike, given that they focus so much on late-cycle employment data. In short, given where we are, I wonder if good Q2 GDP news will be received as bad news before long.

Whatever the case, it’s way too early to change our stance beyond what we’ve already done. To recap, we have been walking away from some of our utilities, REITs and staples and instead getting a little more exciting with a few broader-ranging stocks. They aren’t gigantic changes, as I suspect we’re just dealing with a temporary bobble, but it got us a bit of a change in character before the short term sequential data improved too much.

If there’s one thing I’m most surprised about it’s that the market in general has done so well. Many international markets are down 20% from their 2015 peaks, and I think it’s kind of incredible that our markets have ignored our fundamentals so much to avoid that outcome. I suppose it’s the effect of a very accommodative Fed.

In general, looking at trends like the profits cycle, the credit cycle, and the employment cycle, the balance of evidence remains that economic data will continue to trend lower. That doesn’t mean we have to trend down in a straight line, as June retail sales data demonstrates. While I think it’s unlikely that the numbers start to trend positively already (I don’t know of a time when that’s happened in the past) we will monitor and see if we need to make more changes. For now, though, the changes we’ve made seem reasonable and I wouldn’t make any additional changes. We’re investing now for what will happen in the months ahead, not in response to what’s happening right now. If we were a hedge fund with much more rapid turnover, maybe we’d have a different setup, but right now, for our long-term philosophy, it doesn’t make sense to make big changes for what looks like a temporary spike in the road. If the spike turns into further improvement in Q3 maybe we’ll be forced to adjust, but so far that hasn’t happened and I’m not going to guess.

One last thing I want to address is quarterly earnings. Over the last several years the quarterly process has really changed. First, Wall Street estimates are very ‘friendly,’ basically designed to be beat. The general strategy is to start off with an estimate, then walk it down. That initial estimate doesn’t get beaten, but the revised estimate is, and some investors are dumb enough to fall for it. What do we do? Since the estimates have become somewhat useless, we focus on year-over-year (y/y) numbers. For instance, people were excited that a large financial stock beat numbers, but they were down y/y, which isn’t so exciting in my book.

The other thing that has greatly proliferated in the last few years is non-GAAP earnings. For instance, a large technology company just reported a huge non-GAAP beat, but the GAAP numbers were actually a loss. Again, people can get excited about made-up numbers if they want to, but I’m not interested. I lived through 2000 – how’d that work out for them?

The market is overbought with sentiment through the roof and volatility very low. That’s a dangerous time to buy. I think it makes more sense to watch and wait and let other people get excited.